MUNICH – Over the rest of the twenty-first century, the global human population is expected to keep growing; more important, it will keep growing older. By the year 2100, the United Nations expects there to be more than ten billion of us, up from 7.3 billion today. In the meantime, the number of people older than 60 is expected to double by 2050 and more than triple by the end of the century.

As societies around the world prepare for swelling numbers of retirees, the policy challenge will be to ensure the financial sustainability of pension systems while guaranteeing adequate incomes for those no longer working. Today, according to recent research by Allianz, only four countries appear to have achieved this: Finland, Norway, the Netherlands, and New Zealand....

...Many of the countries that performed poorly on this test – most notably France, Greece, Italy, and Spain – were European welfare states where generous public pensions place heavy burdens on national finances...By contrast, many of the countries that ranked highly in our sustainability rankings did so because their public pensions systems covered only the bare minimum necessary to keep retirees out of absolute poverty....

...When it comes to adequacy, mature pension systems in developed countries perform well. The Netherlands topped our list, followed by Denmark, Norway, Switzerland, Japan, and Austria. These countries mostly provide robust public pensions, supported by other income streams and non-pension wealth, and benefit from longer working lives and lower health-care spending.

Notably, not all countries that scored well on sustainability were highly ranked when it came to adequacy. On the contrary, performing well on both measures was the exception.

Australia, for example, is at the top of the list for sustainability, but ranks 35th out of 50 for adequacy. Workers in Australia retire early, often have limited non-pension wealth, and face substantial living costs. Superannuation – a government-mandated private savings plan – does not yet have enough assets to compensate for the country’s relatively parsimonious public pension system. The problem is aggravated when people take lump-sum payments and do not transform their assets into an income stream for retirement. In short, Australia’s pension system may be sustainable, but it is unlikely to meet its retirees’ needs....

...As societies age, the delicate balancing act between caring for today’s pensioners while ensuring the rights of future generations will become more difficult – and more important. Failure would result in overburdened and unsustainable public finances, and would expose a significant and growing group of voters to acute poverty. As any pension saver knows, the time to prepare for the future is now.

The report on which the article is based can be downloaded here. They also did a previous report on pension sustainability (download here).

The reason why I’m covering this is because Allianz includes Malaysia among the countries they assessed. The reports make for depressing reading – although the sustainability of our pension system is middle of the pack (26th out of 50 countries), we’re near the bottom on adequacy (48th). Quite simply, as a country we’re not saving enough for retirement.

There’s a dichotomy here as Malaysia ranks in the top 30 countries in terms of gross national savings (from the latest IMF World Economic Outlook). The problem we and many other countries have is that the bulk of national “savings” is actually the operating surplus of the corporate sector, not households.

In Malaysia’s case, corporate savings amount to about 95% of national savings (as of 2013). Discretionary household savings is just 2.5% of gross national savings, and the household savings rate is a very depressing 0.75% of GDP and 1.4% of adjusted disposable income. The numbers are substantially higher (around 4.5% of GDP and 8.4% of income) if you include all the mandatory and voluntary pension schemes we have (EPF, KWAP, LTAT, PRS etc), but whichever way you look at it, the household savings rate is low and highly skewed towards higher income households. To put it another way, wealth inequality is fairly high.

I’ve run the numbers on population ageing, based on the latest DOS projections, and Malaysia will see a rate of growth of the over-60 segment that is 3-5 times faster than the population as a whole. The size of the younger age cohorts have levelled off – by 2030, Malaysia’s population pyramid will have changed from a fat pyramid shape to a cylinder.

All this, and I haven’t even touched on the coverage issue – only a little over half of the workforce have any pension coverage at all, inadequate as these may be – or the results of the Financial Capability and Inclusion Demand Side Survey from BNM, which suggests savings and assets outside the pension system is even more inadequate.

All in all, this is a problem that we have to address, and the sooner the better.

2 comments:

I am actually very surprised at the extent to which corporate savings dominates national savings. What does the high corporate savings actually mean in the Malaysian context? Are corporations actually getting much more efficient and robust as a whole or are we actually seeing corporations parking their cash in view of a not so favorable investing climate?

And in view of a changing demographics to increasing levels of people aged 60 and above in the future, what kind of policy moves does the government have? Are we going to see an increase in the retirement age like what the US did? Or would pensions schemes engage in riskier investments to generate the required returns?

In the national accounts, corporate profits = corporate savings. Whether they utilise these savings is another matter.

However in aggregate, the fact that Malaysia runs a current account surplus, and the government and household sectors collectively run a deficit, implies that corporates are not investing enough (the country as a whole has "excess" savings).

There's some tweaking we can do to improve viability of the system as it stands - raising the retirement age is one option, though I would prefer to peg the retirement age to life expectancy (Singapore's is transitioning towards that approach). At bottom however, this is a problem of insufficient incomes.

On the last point, it's happening already. Norway's pension fund for example, has a local mandate here to invest in small cap stocks (!) and property, while quite a few US and Canadian institutions have money in hedge funds.

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About Me

An applied and practicing economist in the Malaysian financial sector.

The purpose of this blog was first to have a way to put down and present my ideas, work in progress, and thoughts on the Malaysian economy. The second reason was to hopefully attract critiques and feedback, that would help me improve on my own understanding of the way the world works, or at least, this little corner of it.